In June of 2012, a proposal by the National Futures Association requiring stricter regulation of PAMM accounts went into effect, sending many money managers and CTAs scrambling for PAMM account alternatives.
A PAMM account, or Percentage Allocation Management Module, is simply a way for investment management firms and CTAs to manage individual investor accounts more efficiently. Multiple individual accounts are aggregated into one “Master Account,” which is traded by the money manager or CTA. It is operated as one pooled account and the P&L is divided equally among the investors based on their equity in in it.
In April of 2012, James Bibbings, a former NFA supervising auditor, wrote a very informative post discussing the implications of the pending proposal. Appearing on SeekingAlpha.com, the post explained how the NFA felt PAMM accounts too closely resembled Commodity Pools, without being registered as such.
The points they brought up described multiple instances of structural problems. Issues with liquidity and margin were posing risks to investors and contributing to questions about the fairness of the division of P&L among sub-accounts. In the proposal, the NFA recommended the restructuring of PAMM accounts as a means of eradicating any dangers they could cause participating investors.
Bibbings also notes that PAMM scrutiny has reached the state level. Pennsylvania state security regulators saw the PAMM allocation system as a mechanism that was generating a “synthetic securities product.” This view made PAMM accounts subject to many additional securities laws and regulations in Pennsylvania, and could do so in other states, too.
At the time of Bibbings post, things weren’t looking good for PAMM accounts as they fell under intense regulatory scrutiny. Two months later, after the proposal took effect, “traditional” PAMM accounts began disappearing to make their necessary compliance changes. Some companies have seized the opportunity to create PAMM alternatives and others offer consulting services to help existing PAMMs comply with the new rules. These instruments play an integral role in providing CTA’s and Money Managers with the key benefit of PAMM accounts: centralized management.
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